Group Essay Assignment:

Group Essay Assignment involves a group of up to five students researching a current issue in Australian capital markets and submitting a group written essay comprising not more than 3,500 words. This essay should clearly set out the issue being investigated, the factors being considered, and the group’s conclusion. It should display internal logical consistency and excellent grammatical and referencing skills. The essay topic will be announced in Week 5 and is due in Week 10. It will carry a value of 20% of total unit marks.

Current Issue:

“The Australian Securities and Investments Commission signalled a tougher approach to disclosure over the weekend in a record $300,000 fine against Leighton Holdings for failing to disclose immediately a $907 million earnings write-down last year.” AFR, 21/3/12, p.3

Essay Topic:

“Discuss Australia’s continuous disclosure practices in light of ASIC’s announcement that it plans to scrutinise profit forecasts that could be considered misleading.”


1. Introduction

The current issue is related to the tough stand adopted by the Australian Security and Investment commission in March 2012 in relation to Leighton Holdings. Leighton holdings founded in Australia in 1949 has been involved in engineering and infrastructure contracting (Leighton, 2012).ASIC claims the noncompliance of disclosure norms by the Leighton. The ASIC has served three notices on the engineering, construction and the property companies claiming noncompliance of disclosure norms of the Corporations Act 2001 and the provisions of the ASIC. On the receipt of the claim, Leighton has agreed to pay a penalty of $300,000.Alongside agreed to upgrade their current compliance systems after being checked by the Australian securities and Investment commission.
The penalty has been imposed after a $900 million plus downgrade in earnings in the previous year causing a sharp plunge in the earnings and reflecting a loss for the organization. The loss has occurred after the company claimed to pose a profit of $480 million approximately. The ASIC has been investigating the Leighton group for over a year and conclusive information on the misleading information provided by the company. ASIC has claimed noncompliance of disclosure norms by Leighton and misleading the market projecting high growth performance.
(Yahoo Pty 7 Ltd, 2012)
Though the company has accepted the infringement notices and agreed to review their disclosure policies but however not accepted breach of law. The downgrade of $1.1 billion largely driven by high cost infrastructure projects has resulted in a loss of $427 million. The downgrade has come from the Brisbane Airport Link toll road, Victorian Desalination Plant and the Middle Eastern unit of the Habtoor Leighton Group. This has sent deep signals to the market resulting in a sharp fall in the share prices and low market capitalization. Thus the misleading information provided by the company has resulted in huge losses to the investors and shaken the investor confidence in the company.
The aim of the paper is to examine the active role played by the ASIC to avoid such situations in the future. As well as examine the current disclosure practices adopted by businesses to provide maximum protection to the investors. The ASIC should also upgrade the rules and regulations to ensure transparency in the system and ensuring the ethical conduct of business.
2. Role of ASIC

The ASIC is Australia’s securities and financial market regulator. Formed with the aim to protect investor interests and ensure transparency in financial market operations. It regulates 1.5 million corporations, 4,415 financial services businesses and 15 financial markets. The ASIC plays an important role in regulation of the financial markets. The ASIC covers a wide range of aspects related to the financial markets to ensure the smooth functioning of the system. The ASIC not only regulates the financial market but also the financial services organizations, investment advisors, super narration as well as insurance and credit. Thus it can be said that ASIC is the financial market ‘watchdog’.
The regulatory functions of the ASIC can be divided in 3 broad categories

Figure 1: Functions of the ASIC
Thus the ASIC can also be called a “regulator with many hats”. It dawns multiple functions to ensure a fair trade in the financial market.
2.1 Functions of the ASIC
1. Consumer Credit regulator
As a consumer regulator the ASIC regulates individuals and businesses providing consumer credit services these including banks, credit unions, finance companies, and mortgage and finance brokers
2. Market Regulator
As a market regulator the main function of the ASIC is to regulate the financial markets thereby ensuring free and transparent trade on the exchanges.
3. Financial service Regulator
As a financial services regulator The ASIC issues licences as well as monitors businesses and individuals providing financial services .The goal of the organization is to ensure honest and efficient operations of such businesses.
The ASIC complies with the norms issued in the Consumer Protection Act 2009 and ensures protection to all the stakeholders in the operations of the financial markets. With its goal to protect consumers in the financial markets the ASIC is an active provider of financial literacy to consumers. The role of the ASIC is to provide transparent information to the consumer enabling and empowering the consumer to make a sound financial decision. The ASIC was formulated with the purpose of maintaining market stability and ensures efficient functioning of the system. The ASIC was formulated to remove the information asymmetry in the financial market as well as maintain a moral code of conduct in the financial market. Before the formulation of the ASIC the financial markets were regulated by the Reserve Bank of Australia. Realising the large scale nature of the financial markets and its stakeholders it came impossible for the RBA to manage the financial market. Thus us APRA and ASIC were introduced. A separation of the institution introduced specialization in the system. The separation enabled understanding different aspects of the financial markets and formulating regulations on the basis of understanding of the different aspects.  The separation has enabled both the ASIC and the RBA identify their lines of accountability for a regulatory task. However the ASIC continue to be supported by the RBA but have distinct regulatory powers and authority(Cooper,2006).
Thus the issue of Leighton’s questions the very basics of the ASIC role as a market regulator and a consumer protector. The ASIC has played an active role by checking Leighton’s holdings disclosure practices. As the information disclosed has led to misleading consumers and suffering huge investment losses. As a result the share price of Leighton dropped drastically from $28.94 on 8 April 2011 to a low of $24.93 11 April 2011.The drop of over 13% posing huge losses for investors because on noncompliance and providing misleading information. Thus the ASIC has to re build investor confidence in the market for this strict imposition of the law is essential. Moreover it is the duty of the ASIC to ensure transparency in the financial markets and this is possible only if honest disclosures on information’s are made by the participants and laws are appropriately enforced.
(Yahoo finance, 2012)

3. Adoption of Strict Disclosure Laws

The current system of financial regulation in Australia has draws its origin from 1966 onwards with the Australian government following a system of de regulation in the 1980’s. The technological changes forced the financial system change in Australia. This however was also accompanied with changes in the regulatory system. The Australian government was posed with challenge to manage and regulate a de regulated financial market. For this purpose the ASIC was formed to regulate and control financial market functions in Australia. Over the years the ASIC has played an active role in monitoring financial market functions and has made several changes to safeguard consumer interests (Cooper, 2006). Strict laws have been formulated as well as enforced to ensure transparency in the system.
Particularly after the case of the Leighton Holdings the ASIC has confirmed the adoption of strict regulations. This includes enforcement of strict disclosure rules. The ASIC has announced to scrutinize the profit forecast of companies that could be considered misleading .The ASIC has planned to adopt a more cautious approach to avoid the occurrence of such an instance again. This is however not the first time that the ASIC has adopted a strict approach over the years ASIC has played an active role in consumer protection .The performance of the organization can be seen over 195 years performance. This ASIC has banned more than 102 illegal schemes involving over 5000 investors and sum of $590 million.The ASIC has adopted strict disclosure norms to protect consumer interests because of the following reasons.
3.1 Increasing Strength of the financial Market

Australia is a fairly small sized open economy .Australia just has a population of is just over 22 million (World Bank estimates) which is less than even 0.5% of the world population, the Australian economy is ranked at 15 in terms of size of the economy. Even with a small size economy the Australian population has large-scale participation in the financial markets .This participation has been subject to increase over the past years.
According to the 2008 estimates nearly 41% of the Australian population has participated directly or indirectly in the stock market. The level of direct participation in the stock market is nearly 36% which is fairly high for a small sized economy like Australia. Australian stock market has experienced an increase in participation not only from investors domestically but from global investors as well. Moreover these days insurance and other plans are often market so there is a large number of indirect participation as well.

Figure 2: Stock Market Participation 1997-2006 ( – accessed on 3/4/2012)
With the increasing number of stock market participants as evident from the above figure it has also become important for the ASIC to ensure protection to this large number of investors. The number of stock participants have doubled from 4000(Approx.) in 1997 to over 8000 in 2206.The increasing number of stock market investors implies large volumes on money being invested on the stock exchanges. Therefore it has become increasingly important for the ASIC to provide free and transparent information to this large population to enabling them to make sound financial decisions. A sound financial decision can be made on the basis on the availability of appropriate information available to the investor. The availability of information ensures a stress-free decision making process for the consumer. The strict law adoption would ensure greater protection to this large population and enhance their capability of making good financial decisions.
3.2 Ethical Business Practices

Today’s management is faced with the challenge of conducting business profitably in an ethical framework. It is important to ensure ethical nature of the financial markets and ethical business practices adopted by the companies. A business usually employees and uses large number of resources of the society like financial as well natural resources like (oil, gas, forests etc.) Therefore it is the responsibility of the business to follow ethical practices to run businesses. The ASIC’s role is to ensure that participants in the stock market follow ethical practices such that free and fair information can be accessed and the investors are not misled. Ethical business practices would not only benefit the corporation concerned but would lead to growth of the financial markets eventually contributing to the growth of the economy as a whole. An ethical business environment is usually a beneficiary of not only domestic investor confidence but also international businesses and investor confidence.
3.3 Rigging of the Stock Market

Stock market manipulation is a deliberate attempt by corporations to interfere with the free and fair trade of the market. This can also be defined as price rigging. The case Leighton clearly reflects ‘Price Rigging’ to some extent. The inflated profit projection increased the expectation of the investors, thus expecting high profitability on shares in the future. The share prices were expected to increase over the period of time. The ASIC ensured that there would be no manipulation by imposing the noncompliance of disclosure norms on Leighton. Therefore to avoid and deter stock market manipulation it is important for the ASIC to securitize information disclosed by the companies. The ASIC exercised its regulatory powers to deter the manipulation. With this attempted manipulation investors had been subjected to huge losses as the share price of Leighton dropped drastically from $28.94 on 8 April 2011 to a low of $24.93 11 April 2011. Rigging also hinders fair trade practices on the stock exchange and often de motivates investors. Therefore it is important that the ASIC play an active role in the scrutiny of information disclosures by companies to avoid both ‘price rigging’ of stocks and as well as the potential manipulation of the stock exchange.
3.4 Identification of Risks

The ASIC already focusses on areas that are of maximum risk such as noncompliance by companies and consumer protection. Therefore it would not be incorrect to say that the ASIC’s approach to regulation is risk based. It is the duty of the ASIC to ensure consumer protection as well as penalize the misconduct in the financial markets. With globalization investors invest in global businesses therefore it is important to ensure a healthy stock market. The ASIC can also be identified as a guardian of Australia’s international business reputation. A free and well regulated market would attract potential investments globally. A healthy business environment improves the terms of trade of the host country as well as serves as a potential investment ground. The ASIC regulatory tools are the best measure to ensure a fair trade market that would appeal to investors globally (Cooper, 2006).
With the case of the Leighton holdings the ASIC has identified the potential risk that exists within the market. The existing risk could have had a more detrimental impact on the market, consumers and other financial market stakeholders. The ASIC has claimed to identify this new area of risk and ensured the enforcement of stricter laws to prevent such a situation in the future.

3.5 Deterrent in the Future

The ASIC is faced with the challenge of a rapidly changing and complex financial structure. It is important for the ASIC to constantly review and update the changes in the financial market. As the corporations grow in size there is an increased threat of corporate collapses which in turn is related to corporate fraud. To prevent the occurrence of the potential frauds it is essential for ASIC to have strict enforcement laws in place. Corporations subject to stricter laws would ensure greater legal compliance as well as deter the corporations to engage in fraudulent practices. A strict scrutiny of all kinds of information disclosed would prevent such activities. However scrutiny should not only be confined to disclosure of information after a business is formed, but the ASIC should scrutinise information giving licences for the business to start up as well.
3.6 Efficient Financial Markets

The enforcement of stricter law would ensure efficiency in the financial markets. The disclosed information would be available easily. Moreover the information provided would be under scrutiny and accurate(Key Media Pty Ltd, 2012) .This enabling investors and corporations in able decision making. Free and fair information would enable transparency in operations of the corporations. The effect of this transparency would eventually trickle down to an efficient stock exchange and thus efficient financial market structure.
Enforcement of a stricter law would also ensure greater legal compliance which would also translate into greater tax compliance, consumer protection as well as availability of free information ensuring able financial decision making.
3.7 Free Information

The decision to introduce new disclosure rules would ensure the availability of more financial information to the investor. Availability of additional information would ensure financial investors and advisors to access information enabling them to make sound financial decisions. Moreover it would remove asymmetry of information between corporations and stakeholders in the financial market. Sound financial information would help the investors to increase their profitability and make future gains in the stock market. It would also ensure stability in the financial gains made from the stock market.
4. Conclusion

The ASIC is constantly faced with a challenge of operating in a complex and ever changing financial structure. With a growing regulatory framework and the expectation of the expansion of the superannuation to nearly $5 trillion assets by 2030.With more products, more investors and higher amount of risk the ASIC has to ensure efficient management systems .The ASIC has to maintain a balance between providing adequate consumer protection, consumer expectation and business facilitation. Living up to consumer expectation is a huge challenge for the ASIC. Over the years the ASIC has lived up to the challenge by ensuring adequate enforcement laws and updating existing laws in the market. These laws have not only regulated the financial markets but have ensured stability in the system and its stakeholders.(Cethereo , 2011)
The case of Leighton is yet another example of the alertness and role of the ASIC. The ASIC to avoid the occurrence of such a case in the future has ensured to adopt strict disclosure law. Strict disclosure laws would enable the scrutiny of information provided by the companies in their annual reports and media releases. A strict regulation is bound to act as deterrent for corporations making unreal profit expectations and thereby misleading the consumer. The misleading information creates a ‘bubble’ in the market which causes instability when the expectations are corrected. ASIC has already taken a strong step by penalising Leighton with a fine of $300,000. This step would also serve as a warning to other corporations intending to provide misleading information. The new disclosure norms are bound to increase accountability of the corporations in the financial market. The ASIC has to play a proactive role in the financial market.
With globalization participation in the financial markets has become risky. Globalization has led to an increase in the financial market participation is Australia with large numbers of international investors participating in the market. This however has exposed the consumers to a higher degree of risk. ASIC has to identify these risks in advance and take appropriate measures to minimize risk and maximise consumer protection. The disclosure norms continue to be influenced by international market conditions and global financial institutions. It is necessary that the disclosure norms have international market compliance. Therefore an adoption of a strong policy measures after learning from the risk exposure from the Leighton and international environment would to prove to be beneficial for the consumers.
However it may also be argued that greater degree of scrutiny would introduce inflexibility in the system especially for the corporation. But however the rules need to be in place to ensure consumer protection. The ASIC norms may be inflexible but would eventually ensure consumer protection and stability of the financial markets.
Both the ASIC and the Australian government are committed to perfecting the model of the existing financial system regulations. The strength of an economy is reflected in the by the stability and strength of their financial market. A stable financial market ensures a environment conducive to the growth and development of the economy and industry as a whole. A stable financial system ensures protection of interests of all stakeholders like business, consumers and investors. Equally important is to ensure stakeholder confidence in the system. Therefore the adoption of strict disclosure norm would not only ensure availability of appropriate information to all stakeholders but will provide a protected and well regulated economic environment conducive to growth.

5. References

•    Leighton Holdings Ltd 2012, “History | Leighton Holdings     ” , viewed on 3rd april,2012 ,
•    Yahoo 7 Pty Ltd. 2012 ,”Leighton accepts ASIC infringement notices – Yahoo! Finance Australia.” Business, viewed on 3rd april 2012, <>.
•    Ket Media Pty Ltd , 2012,”Leighton’s $300,000 ASIC fine puts spotlight on disclosure compliance.” Risk Management Magazine – Australia’s leading source news for business leaders & risk professionals, viewed on 3rd april 2012,<>.
•    Cethereo , Paul 2011,Getting started in shares, viewed on 3rd april 2012,
•    Cooper, J 2006, “The integration of financial regulatory authorities – the Australian experience.” Australian Securities and Investments Commission, pp.1-14


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